No way, not real

February 16, 2019

#fakenews

Because of the government shutdown, we hadn’t received retail sales numbers from the Commerce Department until this week’s report that showed December retail sales plummeted 1.2%, printing the worst report since 2009. This number was a big surprise to economists who were expecting a 0.2% gain. The weakness was across all categories, including a 3.9% decline in online sales, which is a little strange when major online retailers, like Amazon, reported one of the best holiday seasons in years. This report was actually so bad that economists are crying #fakenews on this one and trying to point fingers at any rationale to prove this is a one-time anomaly – the government shutdown, the massive drop in the stock market in December, the Commerce Department’s seasonality adjustments on the numbers, etc. Unfortunately, given that consumer spending is about 2/3 of our GDP, economists are slashing fourth quarter estimates to prepare for the impact of retail sales on slowing economic growth at the end of 2018.

Moral of the story: The number seems so far out of the ballpark of what consumer-related data has been telling us, that it’s hard not to doubt the efficacy of this data. Unfortunately, the January retail sales data will also be contaminated by the government shutdown and the February data might have some effects from the potential of a second shutdown, so we’re going to have to wait a few months to get some clean retail sales data.

Indicators

Aside from the news-making retail sales report, we also saw a few other economic reports this week that pointed toward slowing economic activity. Prices at the consumer and producer level remained low driven by a drop in energy and oil prices. Given that maintaining price inflation near the 2% level is part of the Fed’s mandate, if prices start rising or dropping compared to that 2% level, the Fed would react via the balance sheet or policy rates. We also got a look at January’s industrial production report – while the headline numbers for the January report fell short of expectations, looking at an average of December and January still points to positive, but definitely modest activity for the industrial sector.

Moral of the story: Aside from the continued strength in the labor market, other economic indicators are indicative of moderating growth and slowing momentum in 2019. All signs continue to support accommodative policies from the Fed, which will keep the market happy, but it’s not going to take long for the market to take risk off the table again.

Shutdown shutdown

Both parties were finally able to agree on a spending and border security plan this week, which was signed into law by President Trump on Friday, hours before the midnight deadline that would have sent the government into another shutdown. However, the bill only included about $1.4B for spending on a border wall while Trump had requested $5.7B, so we’re now in temper tantrum mode with the declaration of a national emergency, which will allow Trump to reallocate funds from other parts of the government to build a wall without congressional approval. Congressional members from both parties are opposed to this measure, Trump expects to be sued, how is there not a TV show about the drama of this administration yet? Technically both the House and the Senate could pass a joint resolution to end a national emergency, so let’s watch this unfold.

Moral of the story: The silver lining in all this (which is a pretty big one) is that the government isn’t shutting down again, which means a huge overhang has come off the economy and stock market sentiment, and we should see some optimism.